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By many measures — revenue growth, share price, new content offerings for customers — Netflix is a veritable juggernaut. Investors and company executives alike have been greatly enriched the past few years.

Currently, most analysts that follow Netflix have it rated as a “strong buy,” as its stock price has come back with gusto since a deep December swoon but is still about 25% short of its mid-2018 high.

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But is there another side to the story? Danger could be lurking nearby, suggests a new report from Management CV, which analyzes executive teams for large institutional investors. The firm’s findings aren’t quite predictions, serving rather as alerts to possible market developments relating to executives’ movements, decisions, and suitability for their posts.

With respect to Netflix, items of potential concern for Management CV involve a shift in executive compensation arrangements, the recent departure of Netflix’s CFO, and a large debt-to-EBITDA ratio.

The main smoke signal is the compensation changes, which have been playing out since 2017 and came into sharper focus with the company’s late-December announcement of 2019 pay packages for its leaders.

At issue is both the amount and mix of compensation for Netflix’s “named executive officers.” Continuing trends of the two prior years, the 2019 pay packages are way up from last year’s levels — and, except in the case of CEO Reed Hastings, are solidly weighted more toward cash salary than equity awards.

“The [Netflix] board now pays [some of] its non-CEO executives annual cash salaries that dwarf most S&P 500 CEO salaries and often their total pay plans,” the report says.

Not that the equity awards — which are 100% options as opposed to restricted stock — are trivial. Overall, the pay arrangements are a bad deal for investors, according to Management CV.

“The current combination of large cash salaries and large dilutive option awards asymmetrically skews the future rewards to management and the risks to equity investors,” says the report. It adds that the size and dilutive nature of the executive pay plans are “big even by media industry standards.”

According to Management CV, the “large, outlier cash salaries are inappropriate” for a company with Netflix’s financial circumstances, “regardless of its growth rate.”

To be sure, Netflix is making money. It has recorded modest bottom-line and operating profits for the past several years; its guidance for the fourth quarter of 2018 suggests that the company will show a record net income of $1.18 billion for the full year. (Netflix will release its 2018 earnings on Jan. 17.)

However, largely because of the great costs associated with the company’s energetic development of entertainment content, free cash flow (FCF) is still running negative, and not by a small margin. Netflix has projected that FCF will be negative $3 billion for 2018 and stay roughly at that level in 2019.

Further, Netflix’s stock options, which are granted on the first business day of each month, are fully vested as of grant date. At other companies, options typically vest gradually over a multiple-year period, often three to five years.

At a company with immediate vesting, executives may be more inclined to “take the money and run” at any particular time when the share price is significantly above options’ strike price, compared with their counterparts at other companies. Netflix employees retain their options upon leaving the company and afterward.

A Netflix spokesperson declined to comment for this article. Several sell-side analysts that follow the company did not respond to requests for comment.

The Rich Get Richer

CEO Hastings, unlike his top executives, continues to earn a relatively modest salary. It will be $700,000 for 2019. His upside is in the options, which will have a total grant-day value of $30.8 million. That’s a notable jump from last year, when he earned $21.2 million in options plus an $850,000 salary.

Total pay for chief content officer Ted Sarandos will equal that of Hastings this year, but with a much different mix of components. Exemplifying both the increased executive compensation and the shifting mix, here are Sarandos’ pay breakdowns for 2016 through 2019:

2018: Salary $12 million; options $14.25 million (As occurred at many companies, Netflix’s board scrapped executive bonuses at the end of 2017 because bonus payments became non-deductible expenses under the Tax Cuts and Jobs Act.)

2019: salary $18 million, options $13.5 million

Although at lower earnings levels, chief product officer Greg Peters and general counsel David Hyman have also since the beginning of 2017 received significant, increasingly salary-heavy pay bumps.

The same was true for CFO David Wells, who retired this month after earning a $3.5 million salary and a $2.8 million option award in 2018. His successor, Spencer Neumann, who had been finance chief at Activision, will be paid a lot more: $5 million in salary and $5 million in options this year.

It may not be known for some time, if ever, what Netflix shareholders thought about the big 2019 pay hikes. While under SEC rules companies may have say-on-pay votes each year, they are required to do so only once every three years.

Both the growing cash portion of pay and the exit of Wells are signs that the company’s valuation could be in for a hit going forward, says Renny Ponvert, a former private equity investor who is chief executive of Management CV, in an interview with CFO.

“Why is management taking out all this cash now?” Ponvert says, noting that at Netflix all employees can choose to take their compensation at any mix of cash and options. “Why aren’t they content to take most of their pay in something that’s linked to the interest of the other investors?”

In addition to the salary hikes, multiple Netflix executives have been aggressively selling their shares. For example, Hastings has sold $410 million worth of stock over the past 18 months, while Sarandos has sold $67 million worth during that time.

Still, it’s not a snap to get a read on the company’s valuation outlook, given the recent, unusually high volatility of Netflix stock. It hit an all-time high of $423 last June 21 before free-falling to $234 by Dec. 26. It has rallied back in January, opening on Monday at $334.

However, about the departure of Wells, who is just 46 years old, Ponvert says, “We’re always skeptical when a young but seasoned CFO who is doing well bows out at a company with really strong performance. Often it’s a contrary signal that the company has hit its peak earnings level, or in this case maybe a valuation peak. Some smart finance guys look at their company’s prospects and decide it’s better to cash out than stick around a few more years.”

(For the record, Wells says he’s retiring to go into philanthropy. Opines Ponvert, “I do believe he’ll do the philanthropy thing for awhile, because he’s done it before. But you can expect him to move on to the next great thing.”)

Debt Doubt

Meanwhile, among the biggest headaches for incoming CFO Neumann will be, according to Management CV, an “oppressive debt load.”

Some would actually consider Netflix to be under-leveraged. It does have long-term debt of about $10.4 billion ($2 billion of which was added in December with a new bond issuance), but with the company’s approximately $140 billion of equity, its debt-to-equity ratio isn’t out of whack.

On the other hand, its true going-forward cash liabilities are almost three times that much. Netflix’s third-quarter 2018 balance sheet showed $4.6 billion in “current content liabilities” and $3.6 billion in “non-current content liabilities.” Worse, a note in the financial statements reported that the company had $10.2 billion of off-balance-sheet obligations that “did not yet meet the criteria for asset recognition.”

What does that mean? Companies, like Netflix, that distribute entertainment content (whether movies, TV shows, or streaming video) contract with production companies and others to develop the content. But at any point in time, some of that future content doesn’t yet qualify as assets, so neither it nor the associated contractual obligations are recorded on the balance sheet. That likely accounted for most or all of the $10.2 billion of off-balance-sheet obligations.

So, the traditional long-term debt plus all the outstanding content liabilities amount to a fat $28.8 billion — for a company that is expecting 2018 EBITDA to clock in at about $710 million, is burning through vast amounts of cash, and sports a BB- credit rating.

And, as shown in the third-quarter filing, $8.4 billion of Netflix’s outstanding content obligations was scheduled to be paid off within a year. An additional $8.6 billion was due within three years.

There is, of course, no guarantee that a significant portion of the company’s big equity cushion will or won’t evaporate in the coming months or over the next couple of years. At any rate, Netflix should be an interesting company to watch in 2019.